Online portfolio managers are a hot area right now, and Betterment.com is one that promises “we do everything for you” simplicity combined with relatively low costs when compared with a human advisor. Recently, a reader named RSG left a comment:

In the updated user agreement, Betterment will charge a fee of up to $1000 for an in-kind transfer! That’s absurd and way higher than industry standard for other broker-dealers.

An in-kind transfer, also referred to as a full Automated Customer Account Transfer (ACAT) transfer, is where all of your holdings are transferred to another broker-dealer. Since you don’t sell any positions, any potential tax complications are avoided. I agree that this fee is around $75 at most brokers, so naturally I wanted to verify this claim.

I could not locate any notice of this fee anywhere on the Betterment.com website, even on their “pricing details” pages. The only place I could find it mentioned it is buried on page 59 of their 139-page customer agreement [pdf] last revised on 1/15/2014.

23. Transfer of Assets. Client may request transfer of Assets to an account Client has established with another broker-dealer. […] The fee provisions of the Brokerage Agreement and Advisory Agreement notwithstanding, Betterment Securities may charge a fee of up to $1000 for transferring assets to another broker-dealer.

I opened a $1,000 test account with Betterment myself and I admit that I totally missed this fee. I also verified this by contacting Betterment support staff, and here was their response:

Unfortunately this is not something that Betterment supports right now so we would bring in a third party to do an ACAT transfer. This process costs a fee of $1,000. Again, simply liquidating the funds is completely free.

Update: Immediately after this post brought up the issue, Betterment updated their agreement to eliminate any outgoing ACAT transfer fee as of February 2014.

While I appreciate the response from their support staff, it would be nice to see some due diligence in proactively informing their customers of this change. It would be nice to see someone from Betterment respond to this blog post regarding this.

Yeah, my friend told me about this a month or two ago, when he emailed them about transferring his account. He thought it was a joke/typo, especially since he had less than $400 in his account. Not sure who at Betterment thought this policy was a good idea, but maybe it’s a last resort to monetize people?

Really, this statement is a bit funky. Have you considered the possibility that nobody has used it because it cost $500-$1,000?!? People don’t switch brokers often, but the ACAT system is definitely used regularly. I’m sure Betterment has access to better statistics on that than I do, but I’m willing to bet the rate is non-zero.

Also, if it is indeed so rare, then why make it cost $1,000? I think now that it is public then you realize that it can serve as a fence to keep people in (which then keeps people out).

Katherine from Betterment here. We are in the process of building a better ACAT system that will eliminate all costs. In the meantime, we are eliminating that fee, effective immediately. I apologize for the inconvenience when attempting to directly transfer your assets. Thank you for bringing this up and I hope we can work together in the future.

Excellent, thanks for the heads up indexfundfan. I still feel bad for the folks that had to pay the big transfer fee up until now, not to mention all the folks scared off from moving their money. But I’m glad this is addressed now, even if it took a bit of sunlight to get it done.

What do you mean “We are in the process of building a better ACAT system that will eliminate all costs.” ? The beauty of the ACAT system is that it is a SYSTEM – other people are on it. If you build a whole new system, who will join it? Why not just plug into the existing system?

Betterment’s trading system was built from the ground up in a vertically integrated manner to allow for a number of efficiencies for our customers. As a result, supporting an in-kind transfer (such as ACAT) takes additional work on our end before the customer’s positions can be handed off to the system that connects other brokers. Given how little interest there has been in such transfers (fewer than 20 inquiries over 3.5 years, with over 30,000 customers) we’ve focused our resources on improving Betterment’s offerings for our customers. Streamlining the process that has to happen on our end for an in-kind transfer is in the works.

In-kind transfers are seen as the default by financial advisors, as it requires no work for them, and the customer pays the fee. In our experience, a customer’s advisor generally requests it, in many instances intending to liquidate the portfolio anyway, and move into their preferred portfolio (thereby eliminating any tax deferral benefit). On the rare instances when we’ve received inquiries about such transfers, we always try to learn the circumstances. In all cases, customers chose the cash-out option, always available and free (and fast and requiring no paperwork from anyone).

Thank you for the response. Maybe I didn’t ask my question quite clearly, and I apologize for that. Are you really “building a better ACAT system” or simply integrating the existing ACAT system into your current offering? It seems like the former would be tough, as you would have to convince other brokers to join your ACAT v2 system.

Your response that you are “Streamlining the process that has to happen on our end for an in-kind transfer is in the works” seems to indicate that you are merely integrating the existing system into your platform (albeit possibly with a smaller fee) and not building an entirely new system from the ground up.

It is also worth noting that when you say “In-kind transfers are seen as the default by financial advisors, as it requires no work for them, and the customer pays the fee,” that is true, but it is the OUTGOING broker who charges a fee, not the incoming broker – I cannot think of a broker/custodian that charges you to ACAT funds into your account. Therefore the fee charged that was charged (and is now graciously being waved) by Betterment is completely under Betterment’s control, so calling it a symptom of a failed industry is not entirely correct.

Thanks for your comment, and apologies for the confusion. What we are building is better integration with the existing network. Also, to clarify: the transfer fees are not a symptom of the industry – rather, it’s the default preference for the transfers themselves, when they serve no benefit other than to make the advisor’s life easier. The benefit of an in-kind transfer is almost always overstated – but it’s what advisors are used to. Unless the customer intends to maintain the same assets at the destination, liquidation at the source (Betterment covers the cost of all trades) is more efficient and cost effective, and we’ve focused our efforts on building the fastest withdrawals in the industry (see this post for more information: https://www.betterment.com/blog/2013/11/13/your-money-on-your-schedule/). In our experience, inquiries about in-kind transfers are usually in the context of liquidating and transitioning the portfolio anyway (meaning the benefit of the in-kind transfer vs a liquidation is effectively zero). We’ve used these opportunities to clarify for our customers which practices actually make sense, given their circumstances, and which are symptoms of “business as usual” in the industry, even when a more efficient alternative is available.

Why would someone choose Betterment over Vanguard, Fidelity, Schwab, Merrill Edge or TD Ameritrade? Someone above said it is rare to make transfers between brokers. I did so twice in 2013 and there were no transfer fees and I collected $1600 extra cash before taxes.

Betterment is more comparable to the investment products offered at Fidelity, Schwab, Merrill Edge, TD Ameritrade, ETrade like the Managed Portfolios, select, or managed investments. You pay an annual fee for this ‘managed’ account, usually from 0.25-1.25% on investments’ balance; and this is in-addition to the expense fees for any mutual fund or ETF within your managed portfolio. Betterment is just cheaper on the annual fee rate, and their portfolio maybe different with other brokers. For the do-it-yourself self direct investor, you’d stick with the known brokers.

I have been using Betterment for the past 2 years and recently started using FutureAdvisor and Personal Capital as well. I am working on setting up a comparison between the 3 with my own money.

To answer Why would someone choose Betterment (or any of the other online financial tools)? I compare it to cooking / eating fast food / eating at a restaurant. You can always DIY and save money, use better ingredients, enjoy the experience of cooking but it all takes time and effort. The large financial firms serve as restaurant chains – convenient but higher cost and usually start pushing their own products for better or worse. Personal advisors are like personal chefs working for the mafia – who knows what you are eating but they can make it look fancy at a cost that usually doesn’t pan out. Betterment, personal capital, future advisor serve as the middle ground of do-it-yourself, low cost but not fast food — maybe Chipotle, Panera. They all have a similar strategy with a different price structure – low cost etfs, re-balancing, diversification with asset allocation all on a web based platform driven mostly by computer models with some human input. Not sure if that helps but that’s how I see it and we will see how this all turns out in the future.

Regarding Katherine’s suggestion that the tax benefit is usually eliminated since assets often liquidated, this is not case as I understand if for transferring a Roth IRA from one institution to another. If I first cash my Roth in order to set up a new Roth at a new institution, this triggers an automatic tax consequence. However, if I move my Roth to another institution as an in-kind transfer, tax consequences are avoided. Period. In this case, liquidation of any transferred holdings and repurchasing other investments to fund the new account has nothing to do with it. The benefits of an in-kind transfer are clear. I would want to avoid the tax consequence at all costs, even if it is just a tax reporting requirement. I was strongly considering opening a Roth with Betterment today but feel a little leery based on just a Twitter post.

The $400 fee is back!! Now it’s moved to page 54 of the customer agreement. The promise eliminate the fee was either a lie or didn’t stick very long since it was announce on 2/24, now less than 6 weeks later. Here is the current statement in the agreement on page 54:

“The fee provisions of the Brokerage Agreement and Advisory Agreement notwithstanding, Betterment Securities may charge a fee of up to $400 for transferring assets to another broker-­?dealer.

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